Will China General Plastics' (TPE:1305) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, China General Plastics (TPE:1305) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for China General Plastics:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = NT$1.1b ÷ (NT$13b - NT$1.8b) (Based on the trailing twelve months to September 2020).

Therefore, China General Plastics has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Chemicals industry.

See our latest analysis for China General Plastics

In the above chart we have measured China General Plastics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We like the trends that we're seeing from China General Plastics. The data shows that returns on capital have increased substantially over the last five years to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 20% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From China General Plastics' ROCE

All in all, it's terrific to see that China General Plastics is reaping the rewards from prior investments and is growing its capital base. And a remarkable 146% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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